Posted by: Josh Lehner | February 24, 2021

Oregon Economic and Revenue Forecast, March 2021

This afternoon the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.

The economy is emerging from a dark winter. The resurgent virus of a few months ago is in full retreat. The outlook brightens with every inoculation. The stage is set for stronger economic growth this year and next than the U.S. has experienced in decades, possibly generations. The combination of increased vaccinations, large and swift federal policy responses, and a more resilient underlying economy, results in a cycle unlike anything experienced before.

Most encouraging is that the amount of economic scarring to date in terms of business closures and permanent layoffs is much better than first feared. Total personal income is higher today than it was prior to the pandemic, despite Oregon having 160,000 fewer jobs. Households, particularly those in the middle and upper parts of the income distribution have built up considerable amounts of savings. As the pandemic continues to wane, pent-up demand will be unleashed, fueling growth in the months ahead. The shift in spending out of physical goods and back into labor-intensive, in-person consumer services will raise employment significantly. While the labor market remains in a deep hole today, a bit more than half of these lost jobs will be regained this year. The rest will be regained next year. Oregon’s economy will return to full employment by early 2023, or 6-9 months sooner than expected in previous forecasts.

Although many are suffering, aggregate income has risen sharply during the recession. As an income tax state, Oregon’s primary revenue instruments have followed suit. The General Fund revenue outlook has brightened accordingly. Immediately following the start of the pandemic, the revenue outlook was revised down by around $2 billion. As of the current forecast, this hole has completely been filled. The new outlook calls for a bit more revenue than was expected before the recession began.

Many factors are playing into the unexpectedly strong revenue collections, but two reasons stand out in particular. First, the unprecedented amount of federal aid has translated into around $1.5 billion in additional Oregon tax liability. Second, unlike previous recessions, asset markets have continued to gain value and corporate income has held steady.

Healthy revenue collections together with the strengthening economic outlook have put Oregon’s unique kicker law into play. Following a booming first half of the biennium, Oregon’s General Fund revenue outlook was inches away from the 2% kicker threshold when the pandemic hit. After filling all of the recessionary hole, the March 2021 forecast calls for collections to exceed the threshold by $170 million (0.9%), resulting in a kicker credit of $571 million. However, this kicker credit is far from a sure thing. With one more tax season left in the biennium, much uncertainty remains. During peak tax season, the Department of Revenue has processed more than $170 million of tax payments in a single day. Given the variance seen during our office’s 40 year forecasting record, there is currently a two-in-three chance that a kicker will be triggered when the biennium ends.

Although the additional revenue called for in the March 2021 outlook is a welcome sight, budget writers still face a challenging environment this session. Although personal income taxes have continued to grow this biennium, many other revenue sources such as Lottery sales have not. While better than past recessions, overall revenue growth remains quite modest from an historical perspective. With both federal aid and asset booms expected to expire, revenue growth will remain modest during the 2021-23 budget period. Should this baseline outlook come to pass, state resources will have remained roughly unchanged for three consecutive budgets. This growth is not sufficient to keep up with rising need for, and the cost of, providing public services.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | February 18, 2021

Parents in the Labor Force

Women suffered disproportionate layoffs and higher unemployment rates at the start of the pandemic. However since last spring, much of the gender gap in employment has effectively closed. As of January 2021, male employment in the U.S. was down 5 percent, while female employment was down 6 percent. Here in Oregon the female and male unemployment rates in December 2020 were the same. Noisy monthly data can be challenging and has resulted in some stronger headlines about these gender differences than is probably warranted from the big picture perspective.

That said, while these topline numbers do not show large gender disparities, the same cannot be said if we focus just on parents.

Overall we know that many families are in a bind with online learning. Nearly 1 in 5 Oregonians in the workforce meet the following definition: they have children, work in a job that cannot be done from home, and do not have another non-working adult present in the household. These Oregon parents likely face the direct trade off of going to work, or staying home to take care of the kids, or trying to arrange childcare which is restricted by the pandemic and hard to find and afford to begin with.

Another 11 percent of Oregon’s workforce has kids, do not have another non-working adult present, but can work from home. Juggling work responsibilities and ensuring their kids attend class and get their homework done is a daily struggle, to say the least.

In America we know taking care of the family and household more broadly disproportionately falls on moms. Nationally moms have seen much larger employment losses than dads have. In fact nearly 1 million moms have left the labor force in the past year, twice that of dads. In Oregon that’s the equivalent of around 12,000 mothers leaving the labor force.

Besides the lack of in-person schooling, another contributing factor to the gender parent gap is likely the gender wage gap. If a household has to choose an adult to stay home, it makes more financial sense for the lower-earning worker to do so, which usually means the mom.

Looking forward our office has built in two impacts in the economic outlook from a return of in-person schooling.

First there are the direct jobs associated with in-person schooling. Education employment is down considerably since the start of the pandemic. A portion of these losses are office staff, lunch workers and bus drivers, however the vast majority of the losses are teachers themselves. This is primarily due to the lack of substitute teachers being used with online learning, not layoffs to full-time teaching positions. Given around 75 percent of elementary and middle school teachers are women, and high school teachers are evenly split between men and women, the direct jobs boost from in-person learning will disproportionately impact women.

Second there is the indirect impact of freeing parents’ ability to work when the kids return to the classroom. Parents – primarily moms – will be able to work again if they want, increase their hours, or at a minimum be more productive as they will no longer be simultaneously trying to manage online school and do their jobs.

As the pandemic wanes, our office expects a stronger economic recovery than has been experienced in recent cycles. As a result, Oregon parents are likely to return to the workforce in greater numbers this year as the kids return to classrooms and businesses are looking to hire to keep up with demand. That said, it is always important to continue to monitor these big changes seen during recessions. Research indicates that the longer a spell of unemployment lasts, the lower the probability of finding a job and the higher the probability of dropping out of the labor force entirely. Once someone leaves the labor force, it is harder to return. A drop in the labor force overall, should it persist, represents a reduction in the productive capacity of the economy.

In the years leading up the pandemic, Oregonian moms had begun to return to the labor force in greater numbers due to the strong economy. In fact the share of Oregon moms in the labor force hadn’t been higher in decades. While not the baseline outlook, it is possible the pandemic will undo much of these gains. In the event this does happen, it would likely take years to regain the losses.

Bottom Line: The return to in-person schooling is expected to provide a double boost to the labor market. The increase in teaching positions, and freeing up parents’ time will disproportionately impact moms who have lost, or given up their jobs and stayed home in greater numbers during the pandemic.

Note 1: All of this leaves to the side any discussion in terms of the impact of distance learning on educational attainment, and disparities in terms of access to technology where lower-income, BIPOC, and rural households are less likely to have high-speed internet at home.

Note 2: During our office’s testimony in front of the House Committee on Early Childhood, a question was raised about the impact of daycare providers who close permanently. There is always the risk of supply side disruptions. It usually takes time for new businesses to replace lost ones during an economic recovery. To the extent this does happen today, it could slow the recovery or at least leave more parents in a bind until daycare slots open.

Note 3: The current discussion in Washington D.C. about expanding the Child Tax Credit would have a large financial benefit for families and result in a significant reduction in child poverty.

Posted by: Josh Lehner | February 16, 2021

Economic Impact of Ice Storms and Grid Resiliency

Almost the entire country is going through some form of a cold snap and disruption to the local economy and our personal lives. However in Oregon, hundreds of thousands of our family, friends, and neighbors have been without power for multiple days. Most are in the Willamette Valley. While it may technically be 2021, I’m adding ice storms to the list of plagues that 2020 hath wrought. Given that the Portland and Salem regions account for 58% of the state’s population, 63% of personal income, and 67% of GDP, anything that happens there will have a considerable impact on any statewide numbers.

In terms of the direct economic impacts of the storms, and natural disasters more generally, it is pretty straightforward. Transportation is heavily disrupted and the storms clearly throw a wrench in logistics. For example both I-84 in Oregon and SR-14 in Washington were closed for an extended period of time, meaning east-west traffic through the Gorge was delayed or potentially rerouted which added hours to any trip. There is physical property damage in the form of collapsing roofs, icy roads, frozen pipes, and falling trees or debris. There are repair costs to all of these damages for private firms, the public sector, and utility companies. Perversely the cleaning up and rebuilding phase is a boost to GDP growth, but not to overall welfare. Additionally, outdoor industries like logging, construction, and agriculture — both crops and livestock — are restricted and likely will lose product as well. On the other end some industries do see an increase in sales and activity as local residents stock up on groceries ahead of storms, and hotels fill up as people need a warm place to stay.

Overall these disruptions are likely to cause a short-term drop in economic activity, and wages earned. Hourly workers are the most affected as they miss shift(s) because they cannot get to work due to the weather and/or because businesses close. To some degree, the pandemic and working from home likely muted some of these traditional impacts from natural disasters. However we’re largely past this point in the timeline of impacts and recovery. In Oregon it’s not so much about electrical generation (supply) issues like in Texas, but rather about the transmission and delivery of the electricity. The personal and economic impacts today are more about grid resiliency and being without electricity for days.

An Obama era Council of Economic Advisors report on grid resiliency is a good, easily accessible place to start the discussion. It finds that weather-related power outages nationwide have been rising in recent decades; a trend expected to continue due to climate change. Power outage costs include lost output and wages, spoiled inventory for businesses and households, and the inconveniences and cost of restarting industrial operations. Annually, power outages cost between $18 and $33 billion per year. At the time the report was written (2013) that was equal to a tenth or two of a percentage point of GDP. Years with larger events (disasters and storms) had larger costs than that.

Such findings are confirmed elsewhere in the research, including Degelia et al (2016) who write that “the effect on power lines tends to be the main and longest lasting impact of ice storms as power supplies often remain off for long periods of time, even after the ice storm has passed.” In addition to the economic costs, Degelia et al discuss some of the societal, human, and environmental impacts as well.

While heatwaves generally cause more deaths than do severe winter storms, there are increases associated with both. Essentially whenever temperatures deviate significantly from normal local conditions, bad health outcomes occur. In cold temperatures there are some deaths attributable to direct exposure in terms of hypothermia, frostbite and the like. More deaths tend to come from complications of underlying respiratory and heart conditions as cold is a stressor on the body. Furthermore, indirect deaths from falling debris, or improperly ventilated generators as happened in 2012 in the aftermath of Superstorm Sandy on the East Coast, unfortunately occur as well.

Finally, a more modern impact of power outages and need for grid resiliency is the loss of an internet connection. Broadband access is an increasingly important part of society, both economically and culturally. This includes those working from home, in addition to online schooling, and to say nothing about entertainment options to help pass the time, especially when the pandemic already restricts what we can do in the first place.

Stay safe out there.

Posted by: Josh Lehner | February 11, 2021

Low-Wage Employment in Oregon

We know there is a clear disparity when it comes to the labor market. Workers in high-contact, in-person industries have borne the brunt of the recession. Layoffs here are due to the combination of public health restrictions and fearful consumers. Many of these jobs in Retail, Leisure and Hospitality, and Other Services (repair shops, barbers, nail salons, membership and religious organizations) are low-wage. Since the start of the pandemic our office has been using the following chart to try and highlight and simplify these patterns.

Now, it’s an imperfect chart because it is based on industry trends and average wages within those industries. Clearly there are high-paying jobs in low-wage sectors, just like there are low-paying jobs in higher-paying sectors, such as medical aides, receptionists at law firms, seasonal park workers, and the like. It would be better to look at individual wages not industry averages when making these comparisons. But as we talked about before the household survey has a small sample size and the data is quite noisy, even if the underlying trends are sometimes clear. As such, the chart above is about the best we can do in real time given the available data.

That big preamble sets the stage for a few comments on another data set I’ve been asked about a lot. Click your mouse if you’ve heard that Oregon has seen the largest decline in low-wage employment in the country. The source of that claim is the economic tracker put together by Opportunity Insights. They are quite reputable and our office has used their previous work over the years. Their pandemic tracker uses some unique third party data to create a whole range of estimates. One of them shows Oregon with the largest declines in low-wage employment.

The issue here isn’t the clickbaity potential of “worst in the nation” type discussions. We know in our standard data that Oregon is among the hardest hit states when it comes to employment in low-wage sectors, likely due to some combination of more restrictive health measures and/or more cautious consumers. If you add up Retail, Leisure and Hospitality, and Other Services across all states and compare pre-pandemic to the most recent data, Oregon’s decline (-18%) ranks 42nd out of all states. The median state is -10%.

No, the issue I have with the Opportunity Insights chart and what I’ve been telling folks asking about it is in the story the chart appears to tell. If we take it literally, what it says is that as Oregon’s economy reopened over the summer, employment in low-wage jobs didn’t just stop falling, but it continued to plunge ever since. We reopened bars and restaurants (to varying degrees), and employment fell further. That pattern doesn’t pass the sniff test.

So what’s going on? I don’t know for certain but I think I have a pretty good suspect ID’d. One possibility is the third party data used to compute these estimates simply isn’t representative of the overall economy. That’s usually a key consideration to have with the miscellaneous data sources out there, and why you should always take them with a grain of salt. But I’m not sure that’s in play here in this data. One reason is that Leisure and Hospitality — the hardest hit sector, mind you — trends from our standard employment data and from Opportunity Insights look identical. If the most impacted low-wage sector trends match, how do we get such divergences among all low-wage jobs?

What I actually suspect is happening, or is a key aspect at least, is the impact of the minimum wage. Notice the low-wage threshold in the Opportunity Insights data is $27,000 per year or less. That works out to $13 per hour. On July 1st, 2020 Oregon’s minimum wage in the Portland region increased to $13.25 per hour. Other counties saw increases to $11.50 or $12 per hour, and given the cascading impact of the minimum wage, we know workers above those thresholds likely received raises as well. It’s quite possible that many Oregon workers bumped up in terms of the nationally defined buckets from the low-wage to middle-wage category.

If this is actually the case, then it’s indicative of unique methodological issues largely related to Oregon, at least when trying to compare across states. Normally we would be concerned about the quality of the data, or the quality of the analysis itself. This time it’s possible that both of those are fine. Although we do not know for certain, of course. And Oregon’s middle-wage growth in the tracker data isn’t especially strong. At the end of the day it could be all of the above, or something else driving the wedge between the data sets. But we do know that the intuitive nature of the trends in low-wage employment in Oregon is not likely that it continued to plunge since reopenings over the summer.

Posted by: Josh Lehner | February 4, 2021

Decomposing Oregon’s Population Growth

This edition of the Graph of the Week decomposes Oregon’s population growth and how it compares to other states. Overall Oregon is one of the faster growing states nationwide. Over the past decade we ranked 12th fastest, pending the official 2020 Census results. However our composition of growth is more interesting and worth taking a look as this question comes up from time to time.

In the big picture, Oregon is reliant upon domestic migration to drive our faster population gains. Oregon is not a major port of entry into the U.S. so we get few international migrants. Now, foreign-born residents as a share of our population is pretty normal, so those international migrants end up following the Oregon Trail just like the rest of us, but their initial destination in the U.S. is not often Oregon. In terms of domestic migration, roughly 3-4% of Oregon’s population just moved here in the past year, while 2-3% have moved away in the past year. On net, domestic migration contributes 0.5-1 percentage points of population growth per year over the past decade. This ranks 7th fastest among all states.

The other main avenue for population gains, as discussed yesterday, is the so-called natural increase, or the number of births minus deaths. If we walled off Oregon, would our population increase or decrease? Here Oregon ranks lower than most other states. The low ranking is primarily driven by low birth rates. Overall, women aged 15-44 years old, as a share of the population here in Oregon is a bit above average (14th highest in 2019). However low fertility rates among this cohort (45th) brings the number of births compared to the size of the population lower. On the other end, deaths in Oregon are in the middle of the pack. There are some age differences with younger age cohorts in Oregon having some of the lowest death rates in the nation, while older age cohorts experiencing average to slightly above average rates.

Finally, given this interesting pattern of growth, what other states are most similar to Oregon? Trying to decipher that can be complicated and depends upon your exact criteria. However after taking into consideration both the magnitude of growth and the composition of that growth, the following states tend to look most like Oregon: Delaware, North and South Carolina, Montana, and South Dakota. After that you get into the Arizonas, Colorados, Georgias, and Tennessees of the world. It’s an interesting grouping of states, and I need more time to noodle on it, but that’s what the data is showing for the past decade.

Bottom Line: Oregon’s population grows faster than most states. These gains are primarily due to domestic migration patterns. Most people who move are 20- and 30-somethings. As such, migration provides an ample supply of mostly younger, mostly skilled labor that allows local businesses to higher and expand at faster rates. As such, anything that affects or could potentially impact migration flows is something our office takes seriously. The main reason being if population growth slows below forecast, all of Oregon’s forecasts would need to be lowered, this goes for private sector business sales and public tax revenues alike. It’s not necessarily a problem, unless your responsibilities include forecasting Oregon’s economy and revenues…

Posted by: Josh Lehner | February 3, 2021

Oregon Reaches a Grim Population Milestone

I hope the pandemic progress Graph of the Week cheered you up a bit heading into last weekend because I’m here to bring you back to earth with some new data. The Oregon Health Authority just updated the monthly vital statistics — births and deaths — through December. In calendar year 2020, Oregon looks to have had more deaths than births for the first time, well, ever. Now, it’s not hugely negative. In the past 12 months, deaths outnumbered births by a bit more than 200, at least in the preliminary numbers which will change some when all the records are complete.

Unfortunately this drop was primarily driven by the number of deaths accelerating in recent months. Furthermore, births continue to remain lower than they’ve been in 30 years.

Overall, this general pattern is not unexpected. We did a three part series here on the blog a couple of years ago. In Part 1,we looked at the long-run trends and how deaths already outnumber births in most counties. In Part 2, we looked at how even during the last economic expansion the birthrate didn’t just level out, but continued to drop. In Part 3 we talked about how deaths are rising faster than you would expect with an aging population alone, in part due to the so-called Deaths of Despair. So, again, the general idea that Oregon will become increasingly reliant upon migration for population (and economic and revenue) growth is not new.

What is new is that this happened much sooner than expected; our office’s forecast expected this to begin in 2025. Now we do not have all the data on causes of death, but it’s clear that COVID has impacted the numbers. As the pandemic wanes, the number of deaths should fall as well, meaning Oregon’s natural increase in the population is not yet turning into a natural decrease on a sustained basis. That is still expected to happen in a handful of years, however, and possibly sooner depending upon what happens with birthrates. (Note that we’re still a couple of months out from the data on whether there is any sort of pandemic/shelter in place related increases in the number of births this year.)

Update 1: These trends are seen across the country. Many areas already see deaths outnumber births. We just haven’t seen it yet in Oregon, at least statewide. Where Oregon differs the most from national patterns is the strong in-migration, a very low birthrate that is one of, if not the lowest in the country, and experiencing smaller increases in drug overdoses in recent years.

Update 2: Why do we care? We care because if not for migration, Oregon’s population would decline in the years ahead. While growing pains are real (traffic, housing, etc) the pangs of decay are even more challenging. A declining population impacts the productive capacity of the economy and therefore income growth. That directly translates into lower revenue growth for local businesses, who will struggle more, and tax revenues for providing public services which will need to be cut.

Now for two major caveats.

First, keep in mind these are preliminary data that will be revised as official statistics are reported. At one point last year the preliminary data indicated there were no “excess deaths” in Oregon*. Clearly that’s no longer the case with revisions to earlier months and the acceleration in deaths late in the year. Even so, at a net -200 in the preliminary data, it is possible that future revisions will show that Oregon births ended up outnumbering deaths. We shall see.

Second, the official population estimates from our friends at Portland State are so-called mid-year estimates, or July 1st estimates. So what we really need to look at are population trends from July through June, not January through December. As such, the 2020 population estimates, which we just talked about the other week, show births did outnumbered deaths. And that’s true! At least through June, but that gap between births and deaths has been shrinking for years as seen in the first chart and in our previous posts. In terms of the large increase in deaths late last year, those will be reflected in the 2021 population estimates. Given we have only 6 months of preliminary data, whether or not we see Oregon’s first natural decrease in the official population estimates is still a bit TBD. Even so, given the broader societal trends, we know it’s certainly coming in the years ahead.

* Excess deaths are usually calculated by comparing current totals to those in recent years, something like a 3 or 5 year average in most cases. This is fine so far as it goes, especially if you have a stable population. However in a world where deaths are rising every year, these calculations will always show there are excess deaths because of that underlying trend, even if there was no pandemic. As such, accounting for the expected increase in deaths over time would lower the excess death figures. I know this is down in the weeds, but for this reason I am staying away from those types of calculations and will let the real demographers and public health experts do them.

Posted by: Josh Lehner | January 29, 2021

Encouraging Pandemic Progress (Graph of the Week)

For this edition of the Graph of the Week I am bringing over a new chart from our COVID-19 tracking page. To be honest, that page had not been updated the past two weeks. Apologies for that. But as I was updating it yesterday, the sharp improvements in the pandemic really stood out to me, especially given we know the macroeconomy has temporarily stalled out during the winter months. The number of new COVID cases, and the number of current hospitalizations have fallen nearly 50 percent in the past month or two. Vaccinations continue to increase. Given household incomes remain largely in good shape*, the outlook brightens with every inoculation.

The bottom line is we know the pandemic is not over yet. New daily case counts are flattening in the past week or so. New variants are beginning to circulate that may or may not pose additional risks. Ultimately vaccine supply and delivery need to ramp up further for most of us to be able to get it in the not too distant future. But that process is underway. To the extent we continue to limit the about of economic scarring, or permanent damage that accumulates during the pandemic, the recovery should be stronger, and faster than in recent cycles. I hope this chart lifts your spirits a bit here heading into the weekend. I know it did mine.

* U.S. December data released this morning show a rise in incomes last month and a drop in spending. Some of the income growth was due to the federal aid that was approved near the very end of the year, while the spending declines are in part due to more restrictive health policies around the country trying to stop the spread of the virus as it raged in early winter. Overall, the recovery remains intact.

Posted by: Josh Lehner | January 22, 2021

In the News: Portland Commercial Real Estate

Commercial real estate remains a key risk to the medium-term outlook. The combination of business closures, less foot traffic, and demand for office space points toward less new construction activity in the years ahead. Leasing demand for retail, office, and leisure and hospitality will need to rebound considerably for vacancy rates to decline and rents increase enough to justify the cost of new construction. Overall the strength in residential demand is expected to largely offset the weakness in nonresidential activity. As such the risks are predominantly to the downside depending upon the severity of the declines in commercial real estate.

That’s what our office wrote in the latest forecast (PDF pg 16, report pg 12).

A new report by PwC and the Urban Land Institute shows Portland’s relative ranking across the country plummeting when it comes to the real estate outlook. H/T to Willamette Week for flagging the report. Specifically in the new 2021 report, Portland’s overall real estate prospects rank 66th out of the 80 markets surveyed. This is a big drop from where Portland is normally ranked. As seen in the chart below, Portland tends to rank in the 60-80th percentiles of the annual reports, meaning the local prospects are expected to be better than around two-thirds of all markets in the report. The ranking of 3rd best in 2017 is an outlier. Even so, the drop in ranking is huge.

Note that the number of markets surveyed as changed over the years, going from 42 to 45 to 51 to 75 to 78 to 79 and finally to 80 markets in the last couple of reports. As such I am showing rankings on a percentile basis to keep the comparisons as apples to apples as possible.

Now, there is a bit of underlying data in the report. The survey asked real estate professionals to grade each market on a scale across different categories. In past reports these scores from each category were generally added up to create a total score, which was then ranked from highest to lowest. (The 2021 overall rankings don’t fit this pattern exactly, and I don’t see any methodology notes, but it’s still fairly close.)

What I was wondering was how does the Portland market compare to the median market in the reports. The next chart shows Portland’s composite score compared to that median or midpoint market. As you can see Portland tends to score 10-20% better than the typical market. Again, 2017 being an outlier. In the latest report, Portland scores 6% below the typical market. One interpretation here could be that Portland’s fall from grace in the overall rankings actually means it’s a little below the typical market’s prospects.

If we look at each individual category the markets are scored on, you can see that Portland is below the median market for each one. Portland’s average score for investor demand, availability of debt and equity, and the local economy are all about 4% below the median score. Portland scored 8% below the median for local public and private investment, and 10% below for development/redevelopment opportunities.

OK. So what does this all mean? That’s a bit hard to say. I think there are a number of factors at play.

First, commercial real estate tends to be more of a coincident or lagging indicator of the economy. I think you can see that in the Portland rankings in the first chart. By the mid-2010s Portland had already experienced one of the strongest economic recoveries in the country. Which, of course, then made it a ripe market for new commercial real estate investment in the latter half of the decade. And there was a lot of local development, particularly in multifamily in the urban core, and hotels as well. Despite being pretty small on a national scale, the Portland market consistently ranked among the top handful for the number of cranes being used for construction projects. With all the new developments, that alone would start to make Portland a little less desirable for new projects because of all the new space already coming online. As I’ve been telling audiences during presentations on the outlook, it’s going to be awhile before we build another office building, let alone a hotel. In the 2019 and 2020 reports, Portland had already dropped back down in the rankings.

Second, to the extent these rankings are predictive of future commercial real estate investments, the relative rankings may be more informative than the actual market scores. What I mean is that even if Portland doesn’t rank too low in the underlying data (see second chart), the fact that it ranks 66 out of 80 may be more a hurdle to overcome. While market fundamentals and financing matter, a good amount of real estate investment is also based on confidence. Outside investors — and a lot of large projects rely on them — can pick and choose from opportunities around the country. If Portland, for whatever reason, is deemed a bit more risky or less desirable, then those investments and projects flow to other markets.

Third, there are multiple narratives out there on what is impacting the Portland market and they can be a bit hard to disentangle. On the one hand there are the policy changes enacted by both elected officials (things like the state’s new corporate activity tax, local regulations regarding inclusionary zoning and renter relocation costs) and by voters at the ballot box (increased property taxes for the region, and a new income tax in Multnomah County). Each policy is certainly worthy of a debate on its merits, and the voters have spoken as well. Even so, to what extent do these changes impact the attractiveness of the Portland market? That’s really hard to tell today based on available data, but we need to be mindful of the potential impacts and trade-offs.

On the other hand, the other narrative is touched on in the new report itself. “[Portland, Louisville, and Seattle] markets were the sites of some of the most vigorous protests (and counter protests) over police brutality and racial equity — a possible reason for their lower rankings. Of course, there is a reasonable debate about whether these big shifts are permanent or temporary — and if temporary, how long they will last.” I would add in the wildfires as well, which is mentioned elsewhere in the report.

So if one were just looking at the rankings in the first chart, it’s clear that something happened in the past year. All of the other factors are ongoing and will have different sorts of impacts, but the abrupt change certainly seems to be more about what 2020 hath wrought. We talked a lot about this in our September forecast (starting on PDF pg 10).

In terms of the outlook, I think the report summarizes it well, both in terms of whether Portland’s ranking is temporary, but also in the overall outlook for larger metro ares. “While large cities are likely to struggle for several years, the COVID-induced pause in their appeal is not likely to be permanent… But, like many of the changes that have occurred due to the pandemic, the ultimate impact on the desirability of large cities will be on the margin.” That’s certainly our office’s and the consensus of our advisor’s baseline. We expect Oregon to remain an attractive place to live and work. However, the real threat to the economic and revenue outlook is what happens to our reputation longer term, and whether fewer migrants choose to live in the region.

Posted by: Josh Lehner | January 21, 2021

Oregon Employment, December 2020

Yesterday our friends over at the Oregon Employment Department released the latest jobs report. As I touched on the other day when the national data came out, it’s not good. We ended a bad year on a bad note. That said, the underlying dynamics are about what one would expect. The resurgent virus in the fall and into winter lead to consumers pulling back out of fear, and to another round of restrictive public health policies. The decline in employment in December is basically all in Leisure and Hospitality. Construction and manufacturing lost a few jobs, but are essentially flat. But all other major sectors from retail to finance to professional and business services to health care are all up. It’s not great to lose jobs during a recovery, but the report is not as terrible as the topline numbers would indicate. January will likely be more of the same given the virus-health policies-consumer fear dynamics are largely unchanged.

The key from a macroeconomic perspective is to look through this temporary malaise. Not only is there a lot of pent-up demand and excess household savings, but their is a second major federal relief packages passed just weeks ago. So while losing your job is never fun, nor good from a macro level, there is at least the extra $300 per week in unemployment insurance benefits and an extension of both PUA and PEUC as well. That will cushion this setback. Growth will return as new cases and hospitalizations continue to fall and vaccinations rise. Remember, this cycle is different. Both in the nature or cause of the recession, and in terms of federal policies. Now, on to a few charts.

First, here is a comparison of recessions in recent decades. We currently remain in about as deep a jobs hole as we’ve ever seen. Such a large setback during a recovery is pretty rare. In fact the only real examples we have seen are when there has been a double-dip recession like in the early 1980s (technically 2 separate recessions nationally, but really one long double-dip in Oregon) and following the dotcom crash. Of course the income story is different than the jobs story, due to the federal aid.

Second, when looking at employment across sectors based on wages, it is clear that the recent setback is in the low-wage industries. Middle- and high-wage industries are holding steady or growing every so slightly in recent months on net. The K-shaped cycle continues, at least until the pandemic is over.

Finally, I’m bringing back the core unemployment rate concept chart. Overall the tick up in the headline unemployment rate is due to an increase in temoporary layoffs, similar to what we went through back in the spring. On the better-than-feared news front, the core unemployment rate is holding steady in recent months. Now, the absolute number of Oregonians on permanent layoff or that are marginally attached (have looked for work in the past year but have recently dropped out of the labor force) are rising, which is never good. However when measured as a share of the labor market, it’s holding steady. Nearly a year into this cycle, it looks like there is “only” a few percentage points of pain that needs to be made up, despite the record highs set back in the spring. A key concern has been the amount of permanent damage, or economic scarring that occurs. So far it continues to be much less than feared.

Our office is currently working on the next forecast, which is scheduled to be released Wednesday February 24th at 1 p.m. Note the time change, to align with the revenue committee’s regularly scheduled hearings.

Posted by: Josh Lehner | January 14, 2021

Rising Housing Wealth

Economists are increasing optimistic on the outlook in large part because household incomes are up, and consumer spending has largely followed. But it’s not just current income, we know asset markets are strong as well. Wealth is increasing, which supports additional consumer spending should households want or need it. While stock market wealth is very concentrated among high-income households, real estate wealth is a bit more broadly distributed, and is the key source of wealth for households in the middle and bottom parts of the distribution.

Given home price appreciation and a rising homeownership rate in recent years, the total value of owner-occupied housing is increasing faster than the overall economy as seen in the chart below. For now this excludes rental properties as some of those equity gains go to owners outside of the region, and the rental income from those properties shows up in the current income data.

But looking at the total value of housing overstates the real situation because it does not account for mortgage debt. The next chart tries to adjust for that. These estimates are built off of median mortgage debt and home equity lines of credit information, coupled with median home values. Then adjust those for the share of households who own their home free and clear and the like. While it’s a decent, rough estimate of owner-occupied equity in Oregon, it is also an underestimate of the true number because it is but off medians and not averages (average debt data is not readily available).

Even so, the patterns are very clear. Home equity is much larger today, relative to the size of the economy, then back during the housing bubble. There is a considerable amount of housing wealth that remains largely untapped today. And of course the Bend MSA really stands out on this chart. I was honestly surprised at the sheer size of home equity when I first put this together. I’ll come back to this in the near future, but the relative size of housing wealth in Bend puts it pretty rarefied air when looking across the nearly 400 metro areas around the country.

While the rise in home equity is clearly relevant from a personal finance perspective, what does it mean for the economy more broadly? That’s a little bit harder to say. I’ve spent some time lately re-reading a few research papers. As expected, the main conduit for broader economic implications is through consumer spending.

One of the landmark academic papers from Mian, Rao, and Sufi (2013) finds that the marginal propensity to consume out of housing wealth is 5-7%. That means if your home equity increases $10,000, then you will spend an additional $500-700. More recent research from Moody’s Analytics (no link) estimates that figure is closer to 4% in the years since the housing bubble burst. Even so, with home equity rising by tens of billions of dollars in Oregon last year, that would support additional consumers spending by hundreds of millions, if not a full billion of dollars.

Of course home equity isn’t liquid. One has to do a cash-out refinance, or take out a home equity line of credit or the like to access the wealth and spend it. As Calculated Risk has been tracking over the years, mortgage equity withdrawal has been really tame since the bubble, although it has picked up this year for the first time in a decade. Given the strong home equity position, and record low interest rates, it is possible that we will see more mortgage equity withdrawal moving forward as well, if it is needed.

So what do people do when they withdrawal equity? Recent research out of the Federal Reserve shows that many households spend it on home improvements, furnishings and the like. In other words the most common thing is taking out equity to improve or update the house itself. Other things households do is save a lot of it initially, likely to spend or invest it in the years ahead, or consolidate other forms of debt, with only relatively small amounts spent on other types of things like autos. Generally speaking households don’t treat home equity as an ATM. They seem to generally have a plan, which is great!

Given households incomes are up and the economy is not fully open, what else could households be spending their equity on in the last year? One thing to keep in mind is that we know personal savings and home equity are the major source of funding for small businesses. See the Federal Reserve’s Small Business Credit Survey for more. Even as the economy is doing much better than feared, businesses have struggled. Given the timing here, I think it makes a lot of theoretical sense that some of the recent equity withdrawals are being used to support businesses. Time will tell to what extent that is actually the case.

Finally, another option could be retirees maintaining their general spending or paying for long-term care which can amount to tens of thousands of dollars a year. This was a possibility brought up on Twitter by former Oregon Representative Julie Parrish, with a few others chiming in saying it’s a big, and growing need as the population ages. As our office has discussed before, many retirement-aged households do not have adequate private savings and social security accounts for the bulk of their income. So using home equity as a source of income would make sense when it is needed.

To this point, we know there is a growing number of homeowners who own their homes free and clear. They have lived in them a long time and have paid off the mortgage. This is expected to continue to increase in the years ahead, due to the Baby Boomers retiring. Now, a couple complicating factors here is that the Fed research noted above shows that mortgage equity withdrawal is something that 40-somethings do the most, and 60- and 70-somethings do the least. Additionally, we know downsizing also isn’t really a thing. As such, it is probably reasonable to expect long-time homeowners to largely sit on their equity until the day comes when they either have to move into some sort of assisted living, or their finances dictate a need.

All told, home equity has been increasing considerably in the past decade. Current homeowners are in much better financial positions than they were a decade or two ago. Just how much this equity will support consumer spending and future economic growth is still to be determined. Even without a big increase in mortgage equity withdrawal, it could add a couple tenths of a percent to annual GDP growth. Of course not all of this is good news. The system we have in place where homeownership is the best (only?) path to wealth building for most households isn’t great. Housing cannot be both affordable and a good investment, outside of the forced savings part and paying down debt. One reason equity has risen is due to the undersupply or relative lack of new construction driving prices higher.

Stay tuned, I have a lot more along these lines coming in the near future including an update on construction relative to population growth, comparing housing wealth across metro areas, and digging further into the latest Survey of Consumer Finance to look at the stock of unrealized capital gains.

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